Too Big to Succeed …On December 20, 1994 Mexico's newly installed president Ernesto Zedillo devalued the currency, the peso, by 15%. As a candidate he had said he would "defend the peso like a dog." That day the peso went from 3.47, where it had been for a year, to 3.95 and the trading floors of Wall Street were filled with the sounds of barking dogs … As the crisis continued to unfold it became clear that few, including myself, had understood what could go wrong. What had seemed a relatively straightforward asset was too complex to be managed in such an ad hoc manner. This is far more common on Wall Street than most realize. Just last year JP Morgan revealed a $6 billion loss from a convoluted investment in credit derivatives. The post mortem revealed that few, including the actual trader, understood the assets or the trade. It was even found that an error in a spreadsheet was partly responsible. – Scientific American
Dominant Social Theme: Big private-sector banks need to be busted up.
Free-Market Analysis: Okay, dear reader, here is a conundrum you can help us solve. First, some background.
Chris Amade is the author of a recent article that appeared in Scientific American entitled "Too Big to Succeed," excerpted above. Mr. Amade has a Ph.D. in physics and designed credit models for Salomon Brothers in its heyday.
Scientific American is a great place to publish an article because it is considered to be a pre-eminent magazine of science, a publication the editors of which pride themselves on common-sensical erudition.
So here's our question: How in the world can Mr. Amade write an article complaining that big banks are too complex and ought to be broken up without mentioning central banking?
Somehow, we are to believe that private-sector banking swims in an ether provided by central banks – but this atmosphere is normal and natural while private-sector banking is troubled and abnormal.
We're not making this up. Here's more from the article.
Banks have become massive, bloated with new complex financial products unleashed by deregulation. The assets at US commercial banks have increased five times to $13 trillion, with the bulk clustered at a few major institutions. JP Morgan, the largest, has $2.5 trillion in assets.
Much has been written about banks being "too big to fail." The equally important question is are they "too big to succeed?" Can anyone honestly risk manage $2 trillion in complex investments?
Okay, good points. But if managing US$2 trillion is complicated, how complicated is it to manage US$20 trillion or US$200 trillion? Around the world, central bankers are surely managing this much in aggregate.
The biggest and best scientific journal in the US and a big brain who used to write algorithms for Salomon Brothers have teamed up to bring us the considered opinion that no facility in the world can effectively run a US$2 trillion book. So, just to repeat ourselves, how come no one ever mentions that central banks – running ten or one hundred times that amount – are not up to the task, either?
It is really incredible that even the "best and brightest" can't see that the complexities of the modern money system are entirely out of hand and that it will not end well. Scientific American and Mr. Amade could have done everyone a favor by writing an article explaining that the modern monopoly, fiat-money system as administered by the good, gray men of central banking is not just destined to fail but will likely explode spectacularly.
Of course, we are being a bit facetious here, to be sure. We KNOW why central banks don't come in for the criticism they deserve. The power elite that runs these banks and derives its incomprehensible fortune from them doesn't gladly tolerate the criticism.
Those in the money business who are building up their careers are frightened to mention even the reality of Money Power, much less its problems.
And so we get logical inconsistencies like this one. Top brains writing in the most prestigious science magazines available about how big private-sector banks should be simplified.
But the REAL complexity – and the real disaster – does not lie with private sector banks but with the nightmare of central banking that now has spread about the world like a terrible mesh imprisoning us all.
The corrosive effect of Money Power is that its mere presence dissuades analysis. It perverts the larger conversation and thus renders smaller ones incomprehensible. This is part of the sadness of the Modern Age. The very best minds and institutions are reduced to presenting us with sophistic observations that clearly do not reveal the truth.
They do this because they are afraid. The reserve dollar is not the currency of the world today. Fear is the currency.